🔒 The Warren Buffett effect: Japanese trading firms strategise to navigate potential sell-off risks

Yasutaka Tamura reports on the intricate dance between Warren Buffett’s investments and Japanese trading firms. Berkshire Hathaway’s stakes in these companies elevated their global standing, yet the spectre of potential sell-offs looms. Buffet’s influence, highlighted by a strategic exit from Taiwan Semiconductor Manufacturing Co., prompted these firms to diversify shareholders. While Berkshire’s long-term commitment is uncertain, Japanese companies are proactively fortifying their positions and emphasising robust earnings to mitigate potential fallout, recognising that, in the end, fundamentals outweigh fleeting market sentiments.

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By Yasutaka Tamura

Warren Buffett can cause executives angst when he invests in their companies.

Japan’s trading firms illustrate this point. Berkshire Hathaway Inc. bought stakes in them in August 2020, which raised their international profile and attracted other investors. Over the next four years, the five companies outperformed the broader market. 

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Buffett’s influence can cut both ways however. When Berkshire Hathaway pared its stake in Taiwan Semiconductor Manufacturing Co. last year because of geopolitical risk, the chipmaker’s shares quickly dropped as other investors followed in his wake. With that example in mind, Japan’s trading companies are now taking steps to try and mitigate the impact if Buffett ever decides to sell.

“We don’t think Berkshire will hold our stocks forever,” said Yoshinori Takayama, Sumitomo Corp.’s head of investor relations. “We’re aiming to diversify our shareholders, considering the risks of a selloff.”

There’s no easy way to do that. Berkshire is one of the largest shareholders in all five of the country’s biggest trading companies. It holds between a 7.5% to 8.4% stake in Itochu Corp., Sumitomo Corp., Mitsubishi Corp., Mitsui & Co., and Marubeni Corp.  

Berkshire has given no indication that it plans to sell. Buffett traveled to Japan last April for meetings with executives and afterward increased his holdings in the trading companies. Berkshire has raised funds in Japan by selling a total of 1.3 trillion yen ($8.8 billion) in bonds. The latest was a 122 billion yen note in November of last year. Buffett has said he wants more exposure to Japanese stocks, but will limit his stakes in the trading companies to a maximum of 9.9% unless given specific approval by the companies’ boards. 

Warren Buffett Photographer: Houston Cofield/Bloomberg

Moreover, Buffett is famously hands-off, trusting management to run companies and his vote of support can convince the broader market as when he took a stake in Goldman Sachs Group Inc. in 2008 at the height of the financial crisis. He trimmed his holdings in the bank to help pay for Berkshire’s acquisition of Precision Castparts Corp. in 2015. 

Most of the Japanese trading firms trace their roots back to the late-19th century when the nation ended Samurai rule and sought growth through industrialization and adopting Western practices. Their profits have historically been driven by strong commodity markets. Last year, earnings were helped by diversification into food and infrastructure. A gauge representing the sector on the Topix index surged 39% last year, outpacing the 25% gain in the broader measure. Buffett has invested about 1.3 trillion yen in the companies according to data compiled by Bloomberg and calculations using share prices at the time the investments were announced. His holdings are currently worth about 3.2 trillion yen. 

“It is not impossible for him to sell when the share price becomes high and the investment becomes less attractive,” said Hiroshi Namioka, chief strategist at T&D Asset Management. He added that the market is not expecting Buffett to sell, but since his style is value investing, it can’t be ruled out. 

Berkshire declined to comment on its investments in Japanese trading companies. Buffett has said he prefers investing in Japan over Taiwan as there is less risk from tensions between China and the US disrupting trade. He cut his holdings in TSMC for that reason, even as he called the Taiwanese company one of the best-managed companies in the world. TSMC shares have since rallied. 

Investor relations officials at Mitsubishi and Marubeni said the companies are trying to expand their shareholder base. Mitsubishi conducted a 3-for-1 stock split effective Jan. 1 to lower its share price and attract more retail investors. Buybacks have helped make Itochu the biggest holder of its own shares.

Mitsui said it was making a general effort to broaden its shareholder base, irrespective of any future sale of stock by Buffett. It is looking to attract investors seeking growth and has been highlighting segments with potential for this, such as health care and new energy, according to Hideaki Konishi, general manager of the company’s investor relations division.  

The companies’ earnings potential is ultimately the best protection against the negative impact from Berkshire unwinding its holdings, according to Hideaki Kuribara, senior analyst at Tokai Tokyo Research Institute who has been covering trading companies for nearly 18 years. 

“The profit structure at the companies is the best they have ever had,” said Kuribara. Expansion beyond commodities and in decarbonization, coupled with improved management will shore up support if Buffett ever decides to leave. “If Buffett sells, some investors will follow suit, but fundamentals such as earnings are more important.” 

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